Promoting Timely Payments to Micro and Small Enterprises - A Tax Proposal in Budget 2023
The Indian government has always been keen on promoting the growth and development of micro, small, and medium enterprises (MSMEs) in the country. With the aim to promote timely payments to these enterprises, the government has proposed an amendment to section 43B of the Income Tax Act, 1961 in Budget 2023.
Section 43B: An Overview
As per the provisions of section 43B of the Income Tax Act, certain deductions are allowed only on actual payment. The proviso to this section allows deductions on an accrual basis, provided the amount is paid by the due date of furnishing the return of income.
The government proposes to include payments made to micro and small enterprises within the ambit of section 43B of the Income Tax Act. Accordingly, a new clause (h) is proposed to be inserted in section 43B of the Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 shall be allowed as a deduction only on actual payment.
However, the proviso to section 43B of the Income Tax Act shall not apply to such payments. This means that deductions on an accrual basis will not be allowed in case the payment is not made within the specified time limit.
Payment Deadline under MSMED Act:
Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time specified in the written agreement, which cannot be more than 45 days. In the absence of a written agreement, the payment must be made within 15 days.
The proposed amendment to section 43B of the Income Tax Act will only allow payments to micro and small enterprises as deductions on actual payment basis. In case the payment is made within the time mandated under section 15 of the MSMED Act, it can be allowed on accrual basis.
The proposed amendment is a step in the right direction towards promoting timely payments to micro and small enterprises in India. It will ensure that these enterprises receive their payments on time and help in their growth and development. The amendment will take effect from 1st April, 2024, and will accordingly apply to the assessment year 2024-25 and subsequent assessment years.